Employees’ Provident Fund—commonly called PF—is a retirement benefit scheme that is

available to all salaried employees. It is a very important tool of retirement planning. The tax-
free interest (compounding) and the maturity ensures a good growth of our money.

Both employees and the employer contribute to PF at the ‘rate of 12%’ of the basic wages and
dearness allowance (if any) per month. Thus, the total contribution to PF is 24% per month. PF
provides retirement benefit to us to secure a better standard of living at retirement.

However, there are many things about EPF which most of us are unaware of. The below article
provides you more information about EPF such as how the contributions are calculated based on
basic salary and DA, what are the EPF interest rates, what is pension scheme, etc.

EPF & EPS

Most organisations today offer the facility of PF. EPF (Employees’ Provident Fund Scheme
1952) and EPS (Employees’ Pension Scheme 1995) are the two different retirement saving
schemes under Employees’ Provident Funds and Miscellaneous Provisions Act, 1952, meant for
salaried employees. It is mandatory for every employee drawing a basic pay of up to Rs. 6,500
per month to make contribution towards EPF & EPS. However, employees drawing basic salary
over Rs. 6,501per month have an option to get PF deducted from their salary.

Normally, both the employer and employee contribute 12% each of the ‘basic salary’ of the
employee plus DA (if any). The entire 12% of employee’s contribution is added towards EPF,
while 8.33% out of the total 12% of the employer’s contribution is diverted to the EPS or
pension scheme and the balance 3.67% is invested in EPF.

However, if the basic pay of an employee exceeds Rs. 6,500 per month, the contribution towards
pension scheme is restricted to 8.33% of Rs. 6,500 (i.e. Rs. 541 per month) and the balance of
employer’s contribution goes into EPF.

Thus, the employer contributes only up to Rs. 541 per month (8.33% of Rs. 6,500 in the
employee’s pension scheme account.

Contribution to EPF & EPS

Scheme Employee’s Employer’s
contribution of basic contribution
pay
EPF 12% 3.67%
EPS — 8.33%

Let’s assume, your basic pay is Rs. 10,000 per month and your basic rises 5% each year. Interest
rate on EPF is credited annually at the end of financial year. Your contribution to EPF is 12% of
basic pay, and the employer’s contribution to EPF is 3.67%. The rate of interest for the financial
year 2012-13 is 8.6% per annum. The accounting period of PF is from March to February every
year. The government credits the interest compounded on PF balance in April every year.

Understanding EPF calculation

Monthly Yearly Total Total
Employee Employer Interest EPS
Yrs basic basic EPF amount
PF (Rs.) PF (Rs.) rate (Rs.)
(Rs.) (Rs.) (Rs.) (Rs.)
1 10,000 1,20,00014,400 7,908 22,3088.6% 6,492 24,226
2 10,500 1,26,00015,120 8,628 23,7488.6% 6,492 25,790
3 11,025 1,32,30015,876 9,384 25,2608.6% 6,492 27,432

Interest on EPF
The EPF interest rate is decided by the central government with the consultation of Central
Board of Trustees. The EPF interest rate notification is available on the official website of EPF
India on an annual basis. For FY12-13, the interest calculated on EPF is 8.6%. The contribution
is made to EPF on monthly basis, while interest is calculated at the end of the financial year.

At the beginning of the each fiscal, there would be an opening balance, the
amount accumulated till then. Thus, for next fiscal the new opening balance would be: Old
opening balance + monthly contribution throughout the year + interest (old opening balance +
contribution).

For EPF, compound interest is paid on the amount standing to the credit of an employee as on 1
April every year. However, EPS being a pension scheme, interest is not applicable. Hence, no
interest is earned on the amount accumulated in EPS.

Nomination
EPF also has nomination facility. You can nominate your mother, father, spouse or children.
However you can’t nominate your brother or sister for EPF. The nominee will be contacted at the
time of death of the employee and handed over the EPF money. If a member has a family at the
time of making a nomination, the nomination should be in favour of one or more persons
belonging to his family.

Any nnomination made by such member in favour of a person not belonging to his family shall
be invalid. A fresh nomination should be made by the member on his marriage and any
nomination made before such marriage will be deemed to be invalid.

Nomination is essential. The purpose of appointing a nominee is to have someone who is

trustworthy and responsible to handle the nominator’s assets after his death.

Tax benefits
The employer contribution is exempt from tax, while an employee’s contribution is taxable but
eligible for deduction under Section 80C of Income tax Act. The money which you initially
invest in EPF, the interest you earn and, finally the money you withdraw after a specified period
(5 years), are all exempt from income tax.

Transfer of EPF & EPS

You can apply for withdrawing EPF only if you are not employed for two months after leaving
the previous job. It is recommended to transfer EPF account at the time of joining a new
company instead of withdrawing it as EPF forms the debt part of your portfolio and gives good
tax-free returns.

According to Suresh Sadagopan, Founder, Ladder7 Financial Advisories, employees changing

their jobs should transfer their EPF corpus and do not withdraw it. EPF is currently offering
8.6% annually, which is not taxable. Hence, it is best to stay invested in. If you withdraw the
EPF amount before completing five years of service with an employer, the corpus withdrawn is
taxed. The amount is added to your salary income and taxed accordingly. On the other hand, if
left untouched, it is completely tax-free.

For example, you have a PF account for the last five years and change your job and withdraw the
PF amount, then all your previous years income gets recomputed from the very beginning and is
taxable. This means the tax benefits which you had received for the last five years will get
forfeited—and now your withdrawn PF amount is taxable. Further the employer contribution and
interest received will be added to your current income subject to relief under Section 89.

For EPS, if the service period is less than 10 years, you have an option to either withdraw your
corpus or get it transferred by obtaining a ‘scheme certificate’, if there is a break in service. This
way the number of years of service that you have put in gets transferred to the new account that
you open in the new organisation.
For service below 10 years, you usually get 100% of your EPF & EPS amount invested. In case
of EPF, you get the accumulated amount plus the interest (which is 8.6% for FY12-13). For EPS,
you get your EPS amount invested over the years and the “withdrawal benefit”. The below table
D shows the “withdrawal benefit” which an employee will get if he withdraws his EPS amount
(from six months to nine years).

EPS withdrawal benefit

Return of contribution on exit from the employment
Year of service Proportion of wages at exit
1 1.02
2 1.99
3 2.98
4 3.99
5 5.02
6 6.07
7 7.13
8 8.22
9 9.33
Note: The above table is based on a flat addition in benefit.

For instance: An employee exits from employment after four years of service his wage on exit is
Rs. 5,000, (Return of contribution will be Rs. 5,000 x 3.99 of wages on exit) i.e., Rs.19,950.
Once, an employee’s service period crosses 10 years, the withdrawal option ceases.

Abhishek Bade, Assistant Manager-HR, IIFL, explains, “To withdraw from EPS, an employee
needs to contribute at least for six months. He has to fill Form No. 10 C (E.P.S) to claim
withdrawal benefit. However, if the employee completes 10 years of the service, the withdrawal
option ends. Thus, after 10 years of completion of the service, the employee cannot withdraw
from his EPS.”

EPF withdrawals
EPF withdrawal is not permitted if you are still working. But there are occasions when EPF
withdrawal is allowed. You cannot withdraw it fully, but you can avail non-refundable advance
for the purpose of your children’s higher education and their marriage. You can also withdraw for
medical treatment for self or family, repaying your home loan, construction of house, purchase of
flat, etc. You can avail the non-refundable advance, only after having completed minimum five
years PF membership.

Receiving pension
An employee can start receiving pension under EPS only after rendering a minimum service of
10 years and attaining the age of 58 or 50 years. However, no pension is payable before the age
of 50 years. Early pension—that is an employee receiving after completing 50 years of age but
before 58 years—is subject to reducing factor @ 4% (from September 2008) for every year
falling short of 58 years. In case of death / disablement, the above restriction is not applicable.

The pension amount is payable to the eligible subscriber till he survives. On the death of the
employee, members of his family—whom he has nominated—are entitled for the pension.

Maximum pension
Under EPS, the monthly pension is decided on the basis of ‘pensionable service’ and
‘pensionable salary’.

The formula to calculate pension is:

Monthly pension = (Pensionable salary X Pensionable service) ÷ 70

The amount of pension you get depends upon a fixed formula, which is average monthly salary
of the last year of service multiplied by the number of years of service divided by 70. Remember
your employer shows your salary as Rs. 6,500 for EPS, so the pension is calculated on a monthly
salary of Rs. 6,500. So if you have worked for say 35 years, your monthly pension will come to
Rs. 3250 [(Rs. 6,500 X 35 years)] ÷ 70 according to the formula. Thus, the maximum pension
per month is subject to maximum of Rs. 3,250 per month.

The amount of pension is too less. If you invest Rs. 541 in a recurring deposit (compounded on
monthly basis) at 8% interest rate per annum for 35 years, you would get Rs. 12,40,990 as
maturity value. If this maturity amount is used to purchase an immediate annuity plan offering
over 7% returns p.a., the monthly pension would be Rs. 7,239 which is much more than twice of
Rs. 3,250.

You can invest more in PF

Have you heard of the possibility where you can invest more than the mandatory 12% into your
PF account and get returns on it? Yes, you can always invest more than 12% of your basic salary
in EPF which is called VPF (Voluntary Provident Fund). Apart from contributing the normal
12% of your basic pay, you may choose to put in an extra, say 10% of your salary into the same
account. In this case the excess amount will be invested in EPF and you will get the interest @
8.6%.

EPF contribution is one of the best and least risky ways for salaried people to build their
retirement nest. But remember, your employer’s contribution will be limited to the amounts
payable on a monthly pay of Rs. 6,500 including basic + DA. It is not compulsory to employer,
to match your voluntary contribution.

Read more:

Check your EPF balance online with e-passbook